IR35 in the Private Sector

IR35 reforms for the private sector will take effect from 6 April 2021.

IR35 is designed to reduce tax avoidance by contractors who HMRC believe to be “disguised employees” – people who work in a similar way to full-time employees but bill for their services via their Personal Services Companies (PSC) to make their business as tax efficient as possible. This already applies in the public sector; however, it will now be introduced in the private sector to medium to large-sized organisations who contract with individuals via a PSC.

An organisation will be considered to be a medium to large-sized company if it meets two of the following criteria, for two consecutive financial years:

  • more than 50 employees;
  • annual turnover of more than £10.2 million;
  • balance sheet total of more than £5.1 million;

The key changes under the new rules are as follows:

  • Determining IR35 Status: responsibility for assessing whether IR35 applies will shift from the contractor/PSC to the end user/client (the business or individual to whom the PSC is carrying out work for);
  • Payment of tax and NI: If the end-user/client determines that IR35 applies, the responsibility for operating PAYE and NI moves from the PSC, to the “fee payer” (i.e., the entity which has contracted directly with the PSC);

To determine whether someone falls ‘inside’ or ‘outside’ IR35, there are a number of factors to consider including the following:

  • Mutuality of obligation – is there an obligation on the client (employer) to provide work, and an obligation on the individual (contractor) to accept the work?
  • Supervision, direction, control – to what extent is the work being carried out controlled and directed by the client in terms where, when and how the contractor performs their work?
  • Substitution – is the contractor expected to perform the work him/herself exclusively, or can the contractor bring someone else in to complete the contract?

For further details, please look at the government’s guidance here.